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Income Tax Appellate Tribunal, “B” Bench, Mumbai
Per B.R.Baskaran (AM) :-
The revenue has filed appeals for AY 2013-14 and 2015-16. The assessee has filed appeal for AY 2013-14 and cross objection for AY 2015-16. All these appeals are directed against the orders passed by Ld CIT(A)-53, Mumbai. All these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
We shall first take up the appeals filed for AY 2013-14 by both the parties. The assessee had filed his return of income for this year u/s 139(1)
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of the Act on 29-09-2013 declaring total income of Rs.3,57,59,670/-. The AO completed the assessment u/s 143(3) of the Act on 31.3.2015 accepting the return of income filed by the assessee. The revenue carried out search and seizure operations in the hands of the assessee under section 132 of the Act on 09-01-2018. Consequent thereto, the AO initiated the assessment proceedings u/s 153A of the Act for this year. The AO completed the assessment u/s 143(3) r.w.s 153A of the Act determining total income of the assessee at Rs.43.41 crores by making various additions. The main addition made by the AO was in respect of Capital gains declared by the assessee, i.e., the AO held that the capital gains declared by the assessee are bogus in nature and accordingly assessed them u/s 68 of the Act as unexplained cash credit. The AO came to such conclusion on the basis of report of investigation wing of income tax department, which have alleged that the prices of certain shares termed as “penny stocks” have been rigged in order to gain advantage of capital gain/capital loss. Since the assessee had dealt in one of such shares, the AO held that the capital gain/capital loss declared by the assessee is bogus in nature and accordingly assessed the same by disallowing capital loss and assessing capital gains as unexplained cash credits.
Before Ld CIT(A), the assessee contested the additions made by the AO. Besides the above, the assessee also raised a legal ground contending that the assessing officer was not justified in making all the additions in the absence of any incriminating material found during the course of search. The assessee has raised this legal ground, since the assessment year 2013- 14 fell under the category of “unabated assessment’ and accordingly, the assessee placed his reliance on the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of CIT vs. Continental Warehousing Corporation (Nhava Seva) Ltd (374 ITR 645) and CIT vs. Gurinder Singh Bawa (386 ITR 483).
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The Ld CIT(A) rejected the legal contention of the assessee with the following observations:-
“5.2 The facts and findings recorded in the assessment order by the AO and the submission made by the assessee have been examined. The Appellant has claimed that the assessment for the year was unabated and therefore, the AO was empowered to make an addition based only on the sized materials found during the course of search. Reliance has been placed on the decision of Bombay High Court in the case of Continental Warehousing Corporation (supra), All cargo global logistics and other similar decisions. It is claimed that not a single incriminating document has been found from the premises even though an extensive search action has been carried out on its premises and hence, the addition made by the AO is without any basis.
5.3 Now it is imperative to understand what constitutes “Incriminating material/evidence” and also to examine whether there was any “Incriminating material” in the case of the Appellant.
The term “Incriminating material/evidence” has neither been used in section 153A nor has been defined in the section, however, the Act as well as various judicial decisions provide a hint. Such “incriminating material/evidence” could be any books of account or documents or any information unearthed during the course of search action having a bearing on the determination of total income of a person. Clearly, such incriminating material has to be either the books of account or document (seized or requisitioned) itself or any information gathered during search or statement recorded during the search action which has the potential of affecting the determination of total income of the party to which such information relates. Hence, if a search is conducted to investigate certain allegations which are found to be correct during the search and based on the various documents collected during the search action, specific information or finding is generated on account of inquiries conducted during search process which has a bearing on the determination of total income of an assessee, the AO would be within his power to proceed under section 153A of the Act against such person on the basis of such finding which would also constitute incriminating material. Hence, if during the course of search action, elaborate and thorough investigations are carried out to verify/examine modus operandi of an illegal scheme orchestrated by certain persons and during such investigations, based on ascertainment of various facts, examination of seized books, recording of statements and analysis of documents of a number of entities in coordination with each other, certain information is generated that (i) the scheme violates the provisions of Income tax Act and that (ii) such scheme has assisted various parties who have taken benefit of such scheme in introduction of their unaccounted income in their books in the form of eligible and non-taxable income, thus affecting determination of the total income, then, this information is clearly covered by section 153A of the Act. If a search is mounted to examine existence of an entity, the very fact that no evidence whatsoever is found during such
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would be an incriminating material against the person. The general refrain of the assessee, by placing reliance on various decisions, is that there are no incriminating material found in his case during the course of search action and hence, action taken by the AO against it under section 153A of the Act is not correct. In such claims, the assessee refers to actual seizure of documents having entries in his name. If the search action establishes deployment of illegal schemes for introducing bogus capital in the books which has been utilised by an assessee for his own benefit, such a finding or information would be a sufficient incriminating material for the AO for the purpose of assessment under section 153A of the Act.”
The Ld CIT(A) also referred to the decision rendered by Hon’ble Supreme Court in the case of P.R.Metrani vs. CIT (2006)(287 ITR 209)(SC), wherein the Hon’ble Apex Court has explained the scope of section 132. Accordingly, the Ld CIT(A) reiterated his view again that, if the search and seizure action has resulted in identification of certain entities which have indulged in dubious or bogus transactions in general and during such search it is noted that either some of the searched parties or some other third party has engaged in similar transaction with these entities, such information would be an information of incriminating nature.
“5.4 The Appellant has relied upon the decisions in the cases of CIT-II, Thane vs. Continental warehousing Corporation (Nhavaseva) Ltd 374 ITR 645, CIT vs. Gurinder Singh Bawa (386 ITR 483) Bombay High Court, All Cargo Global Logistics Ltd vs. DCIT CC-44 (147 TTJ 513) and other case laws. The decision relied upon by the assessee talks about “incriminating evidence” or “incriminating material” found during search action and not merely “seized material” or “seized documents”. In the case of the assessee, during the search proceedings, the AO unearthed the modus operandi followed for such dubious transactions and listed out the unusual activities. These findings were also confirmed by the director of the investee company, entry operators and exit providers in their statements. The investigation units have conducted sufficient inquiries and there is substantial material available to demonstrate the above findings. These documents/statements and the overall findings of the search action are sufficient incriminating material to proceed u/s 153A of the Act in case of the assessee. The assessee is incorrect in trying to claim that there are no incriminating material against the assessee for the assessment year under reference.
In view of the facts and circumstances of the case of the Appellant, there was incriminating material/evidences, based on which the AO has initiated and completed the assessment proceedings under section 153A of the Act.”
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With regard to the assessment of capital gains as unexplained cash credit, the Ld CIT(A) deleted both the additions by placing reliance on the decision rendered by the Tribunal in the assessee’s own case. The Ld CIT(A), however, confirmed the disallowance of claim of loss on sale of shares of M/s Ken Financial Services Ltd.
Aggrieved by the order passed by Ld CIT(A), the revenue has filed appeal challenging the relief granted by the AO. The assessee has filed appeal challenging the decision rendered by Ld CIT(A) in rejecting the legal contention of the assessee and also in confirming the disallowance of loss on sale of shares.
Since the legal issue urged by the assessee goes to the root of matter, the Ld A.R first advanced his argument on the legal issue. The Ld A.R submitted that the assessment of AY 2013-14 was completed by the AO u/s 143(3) of the Act on 31.03.2015. The search took place in the hands of the assessee on 09-01-2018. Hence, on the date of search, the assessment of AY 2013-14 was not pending and hence this assessment would fall under the category of “unabated assessment”. He submitted that the Hon’ble Bombay High Court has held in the cases of Continental Warehousing Corporation (Nhava Seva) Ltd (supra) and Gurinder singh Bawa (supra) that the AO can interfere with the unabated assessments only if the search officials found out any incriminating material warranting such interference. The Ld A.R submitted that the search officials did not find any such incriminating material during the course of search. He submitted that the AO has fully relied upon external information supplied by the investigation wing of the Income tax department alleging artificial manipulation of prices by certain people in order to take undue advantage of artificial capital gains/capital losses. However, the search officials did not find any material to prove that the assessee herein was part of such group which indulged in such kind of manipulation of prices in order to take undue advantage. The Ld A.R submitted that the assessee has purchased and sold the share in the normal
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course of his investment activities only and in that process only, the assessee has earned capital gains and incurred capital losses.
The Ld A.R submitted that the Ld CIT(A) has given extended meaning to the term “incriminating materials” and observed that the existence of state of affairs in the case of the assessee as expected by the revenue itself would constitute incriminating material. He submitted that his interpretation given by Learned CIT(A) is not sustainable. He submitted that all types of investigations/enquiries etc. have been carried out by the investigation wing prior to the search conducted in the hands of the assessee. Further, no material vindicating such types of conduct was found in the hands of the assessee. The only information related to their investigation is that the assessee has purchased and sold shares, which were identified as penny stock. However, the assessee has disclosed those transactions in his return of income filed much prior to the search action and further, the AO has accepted it in the regular assessment completed u/s 143(3) of the Act. Hence the revenue is well aware of purchase and sale of shares by the assessee and hence it is not new information and the said “state of affairs” is well known to the revenue. Hence the extended meaning of “incriminating material” given by Ld CIT(A) does not suit to the facts of the present case.
The Ld A.R further submitted that an identical legal issue was urged by the assessee before Tribunal in his own case in AY 2012-13 in ITA No.6422 & 6423/Mum/2019 and the ITAT, vide its order dated 25.10.2021, has given finding that the search officials did not unearth any incriminating material and hence the addition of capital gains made in AY 2012-13 was deleted. He submitted that the Tribunal has followed the binding decisions rendered by the Hon’ble Bombay High Court (referred supra). Accordingly, the Ld A.R submitted that all the additions made in the assessment order of AY 2013-14 are liable to be deleted.
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The Ld D.R, on the contrary, submitted that the investigation wing of the Income tax department has identified large scale of rigging in the prices of penny stocks. The prices of all these penny stocks were manipulated and the rise/fall of prices was not in tune with normal market trend of movement of prices. Further, the prices of these shares are not commensurate with the size of its operations or net worth. It was noticed that certain persons have purchased and sold these penny stocks in order to generate capital gains/ capital losses to suit their requirement. In this process, the unaccounted money was brought into the books of accounts. It was identified that the assessee herein has dealt in the penny stocks and have generated capital losses/capital gains. Hence the search operations were carried out in the hands of the assessee and it was found out that the assessee has declared capital losses/capital gains on sale of penny stocks. Since the search has been conducted in the hands of these assesses in order to examine his dealing in penny stocks, the said state of affairs found during the course of search shall by itself constitute incriminating material. Accordingly, the Ld D.R submitted that the AO has rightly disallowed the claim of capital loss/capital gains in the hands of the assessee. The Ld D.R further submitted that, in the following cases, it has been held that the additions need not be based upon the incriminating materials found during the course of search, i.e., in the absence of incriminating materials also, the AO could make additions in the assessment completed u/s 153A of the Act in the cases of unabated assessments:- (a) E. N. Gopakumar (75 taxmann.com 215)(Kerala) (b) Rajkumar Arora (367 ITR 517)(All) (c) Canara Housing Development Corporation (49 taxmann.com 98) (d) K.P.Ummer (413 ITR 251)(Ker)
The Ld D.R further submitted that the decision rendered by Hon’ble Kerala High Court in the case of K.P.Ummer (supra) is contrary to the decision rendered by Hon’ble Bombay High Court in the case of Continental Warehousing (Nhava Seva) Corporation (surpa). The assessee’s SLP is pending before Hon’ble Supreme Court.
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In the rejoinder, the Ld A.R submitted that the additions cannot be made on the basis of suspicions. He submitted that the assessee is placing reliance on the binding decision rendered by Hon’ble Bombay High Court with regard to the scope of assessment u/s 153A of the Act in respect of unabated assessments. He submitted that a particular state of affairs cannot lead to any incriminating material, since the said state of affairs is a presumption entertained by the AO rather than on certain materials. He submitted that the capital gains/capital losses declared by these assessees are based on actual transactions of purchase and sale of shares through stock exchanges and further these transactions are duly supported by the evidences, which were not found to be bogus. Accordingly, he submitted that the suspicion, surmises and conjectures cannot replace actual facts. The Ld A.R further submitted that the Ld CIT(A) has not followed the above said binding decisions rendered by Hon’ble Bombay High Court and proceeded to uphold the validity of the additions by giving extended meaning to “incriminating material”, which should not be sustained. The Ld A.R further submitted that the Ld D.R has placed his reliance on the decisions rendered by non-jurisdictional High Courts. He submitted that it is well settled proposition of law that the decision rendered by the Hon’ble jurisdictional High Court is required to be followed by all the authorities falling within its jurisdiction.
We have heard rival contentions and perused the record. We noticed earlier that the revenue has carried out search and seizure operations in the hands of these assessees on 09.01.2018. The regular assessment of AY 2013-14 has been completed by the AO on 31.3.2015, i.e., much prior to the date of search. Hence the assessment so completed would fall under the category of “unabated assessment” in terms of sec.153A of the Act.
The contention of the assessees is that the assessment of AY 2013-14 shall not abate, since no assessment was pending on the date of search. It was further contended that in the cases of unabated/finalized/completed
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assessments, the AO could have interfered with the issues already concluded only if the search team has found any incriminating material during the course of warranting such interference. It is the submission of Ld A.R that the search officials did not unearth any incriminating material warranting interference with the capital gains/capital loss declared by these assessee in this year. In support of these legal contentions, the Ld A.R placed his reliance on the decision rendered by the jurisdictional Hon’ble Bombay High Court in the cases of Continental Corporation (Nhava Sheva) Ltd (supra) and Gurinder Singh Bawa (supra). He submitted that the co-ordinate bench has followed above said binding decisions in the assessee’s own case in Asst. Year 2012-13.
The provisions of sec.153A of the Act provide for issuing of notice u/s 153A of the Act for six assessment years immediately preceding the year of search and thereafter, the AO shall assess or reassess the total income for the above said six years. This section further provides that all pending assessment or re-assessment pending as on the date of search shall abate. Hence the assessments of the assessment years falling within the period of above said six years which are not pending, i.e., which have attained finality shall not abate. Assessments of such assessment years are called “unabated/completed/finalized” assessments. The question as to whether the AO is entitled to interfere with such kinds of unabated/completed/ finalized assessments or not without there being any incriminating material found during the course of search, was examined by the Special bench of Tribunal in the case of All Cargo Logistics Ltd vs. DCIT (2012)(137 ITD 287)(Mum), wherein it was held that the AO could interfere with the unabated/completed/finalized assessments only if the incriminating materials found during the course of search warrant such interference, meaning thereby, if the search action did not bring out any incriminating material, then the AO cannot disturb the completed assessments and he has to simply reiterate the earlier total income in the present assessment order.
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The above said view expressed by the Special bench has since been upheld by Hon’ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra). The relevant observations made by Hon’ble Bombay High Court in the above said case are extracted below:-
We, therefore, hold that the Special Bench's understanding of the legal provision is not perverse nor does it suffer from any error of law apparent on the face of the record. The Special Bench in that regard held as under :
"48. The provision under section 153A is applicable where a search or requisition is initiated after 31.5.2003. In such a case the AO is obliged to issue notice u/s 153A in respect of 6 preceding years, preceding the year in which search etc. has been initiated. Thereafter he has to assess or reassess the total income of these six years. It is obligatory on the part of the AO to assess or reassess total income of the six years as provided in section 153A(1)(b) and reiterated in the 1st proviso to this section. The second proviso states that the assessment or reassessment pending on the date of initiation of the search or requisition shall abate. We find that there is no divergence of views in so far as the provision contained in section 153A till the 1st proviso. The divergence starts from the second proviso which states that pending assessment or reassessment on the date of initiation of search shall abate. This means that an assessment or reassessment pending on the date of initiation of search shall cease to exist and no further action shall be taken thereon. The assessment shall now be made u/s 153A.
The case of Ld. Counsel for the assessee is that necessary corollary to this provision is that completed assessment shall not abate. These assessments become final except in so far and to the extent as undisclosed income is found in the course of search. On the other hand, it has been argued by the Ld. Standing Counsel that abatement of pending assessment is only for the purpose of avoiding two assessments for the same year, one being regular assessment and the other being assessment u/s 153A. In other words these two assessments coalesce into one assessment. The second proviso does not contain any word or words to the effect that no reassessment shall be made in respect of a completed assessment. The language is clear in this behalf and therefore literal interpretation should be followed. Such interpretation does not produce manifestly absurd or unjust results as section 153A (i)(b) and the first proviso clearly provide for assessment or reassessment of all six years. It may cause hardship to some assesses where one or more of such assessments has or have been completed before the date of initiation of search. This is hardly of any relevance in view of clear and unambiguous words used by the legislature.
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This interpretation does not cause any absurd etc. results. There is no casus omissus and supplying any would be against the legislative intent and against the very rule in this behalf that it should be supplied for the purpose of achieving legislative intent. The submissions of the Ld. Counsels are manifold, the foremost being that the provision u/s 153A should be read in conjunction with the provision contained in section 132(1), the reason being that the latter deals with search and seizure and the former deals with assessment in case of search etc, thus, the two are inextricably linked with each other.
Before proceeding further, we may now examine the provision contained in sub-section (2) of section 153, which has been dealt with by Ld. Counsel. It provides that if any assessment made under sub- section (1) is annulled in appeal etc., then the abated assessment revives. However, if such annulment is further nullified, the assessment again abates. The case of the Ld. Counsel is that this provision further shows that completed assessments stand on a different footing from the pending assessments because appeals etc. proceedings continue to remain in force in case of completed assessments and their fate depends upon subsequent orders in appeal. On consideration of the provision and the submissions, we find that this provision also makes it clear that the abatement of pending proceedings is not of such permanent nature that they cease to exist for all times to come. The interpretation of the Ld. Counsel, though not specifically stated, would be that on annulment of the assessment made u/s 153(1), the AO gets the jurisdiction to assess the total income which was vested in him earlier independent of the search and which came to an end due to initiation of the search.
The provision contained in section 132 (1) empowers the officer to issue a warrant of search of the premises of a person where any one or more of conditions mentioned therein is or are satisfied, i.e. - a) summons or notice has been issued to produce books of account or other documents but such books of account or documents have not been produced, b) summons or notice has been or might be issued, he will not produce the books of account or other documents mentioned therein, or c) he is in possession of any money or bullion etc. which represents wholly or partly the income or property which has not been and which would not be disclosed for the purpose of assessment, called as undisclosed income or property. We find that the provision in section 132 (1) does not use the word "incriminating document". Clauses (a) and (b) of section 132(1) employ the words "books of account or other documents". For harmonious interpretation of this provision with provision contained in section 153A, all the three conditions on satisfaction of which a warrant of search can be issued will have to be taken into account.
Having held so, an assessment or reassessment u/s 153A arises only when a search has been initiated and conducted. Therefore, such an assessment has a vital link with the initiation and conduct of the search. We have mentioned that a search can be authorised on satisfaction of one of the three conditions enumerated earlier. Therefore, while interpreting the provision contained in section 153A, all these conditions will have to be
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taken into account. With this, we proceed to literally interpret to provision in 153A as it exists and read it alongside the provision contained in section 132(1).
The provision comes into operation if a search or requisition is initiated after 31.5.2003. On satisfaction of this condition, the AO is under obligation to issue notice to the person requiring him to furnish the return of income of six years immediately preceding the year of search. The word used is "shall" and, thus, there is no option but to issue such a notice. Thereafter he has to assess or reassess total income of these six years. In this respect also, the word used is "shall" and, therefore, the AO has no option but to assess or reassess the total income of these six years. The pending proceedings shall abate. This means that out of six years, if any assessment or reassessment is pending on the date of initiation of the search, it shall abate. In other words pending proceedings will not be proceeded with thereafter. The assessment has now to be made u/s 153A (1)(b) and the first proviso. It also means that only one assessment will be made under the aforesaid provisions as the two proceedings i.e. assessment or reassessment proceedings and proceedings under this provision merge into one. If assessment made under sub-section (1) is annulled in appeal or other legal proceedings, then the abated assessment or reassessment shall revive. This means that the assessment or reassessment, which had abated, shall be made, for which extension of time has been provided under section 153B.
The question now is - what is the scope of assessment or reassessment of total income u/s 153A (1)(b) and the first proviso ? We are of the view that for answering this question, guidance will have to be sought from section 132(1). If any books of account or other documents relevant to the assessment had not been produced in the course of original assessment and found in the course of search in our humble opinion such books of account or other documents have to be taken into account while making assessment or reassessment of total income under the aforesaid provision. Similar position will obtain in a case where undisclosed income or undisclosed property has been found as a consequence of search. In other words, harmonious interpretation will produce the following results :-
a) In so far as pending assessments are concerned, the jurisdiction to make original assessment and assessment u/s 153A merge into one and only one assessment for each assessment year shall be made separately on the basis of the findings of the search and any other material existing or brought on the record of the AO, (b) in respect of non-abated assessments, the assessment will be made on the basis of books of account or other documents not produced in the course of original assessment but found in the course of search, and undisclosed income or undisclosed property discovered in the course of search.
It may be mentioned here that Ld. Counsel for All Cargo Global Logistics Ltd. was questioned about the scope of pending assessments as it was his
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contention that all six assessments are to be made, if necessary, on the basis of undisclosed income discovered in the course of search. He was specifically questioned about the jurisdiction of the AO to make original assessment along with assessment u/s 153A, merging into one. However he took an evasive view submitting that this question need not be decided in his case although the question of jurisdiction u/s 153A was vehemently pressed on account of which ground No.1 in the appeal for assessment year 2004-05 was admitted as additional ground. He also wanted the additional ground to be retained in case of any future contingency."
The view expressed by Hon’ble jurisdictional Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra) was reiterated by the Hon’ble Bombay High Court in yet another case of Gurinder Singh Bawa (2017)(70 taxmann.com 398) as under:-
“5. On further appeal before the Tribunal, the assessee interalia challenged the validity of the assessment made under Section 153A of the Act. This on account of the fact that no assessment in respect of the six assessment years were pending so as to have abated. The impugned order accepted the aforesaid submission of the respondent-assessee by interalia placing reliance upon the decision of the Special Bench of the Tribunal in Al-Cargo Global Logistics Ltd. rendered on 6 July 2012. The Tribunal in the impugned order further held that no incriminating material was found during the course of the search. Thus the entire proceedings under Section 153A of the Act were without jurisdiction and therefore the addition made had to be deleted on the aforesaid ground. The impugned order also thereafter considered the issues on merits and on it also held in favour of the respondent-assessee. 6. Mr. Kotangale, the learned Counsel for the revenue very fairly states that the decision of the Special Bench of the Tribunal in Al-Cargo Global Logistics Ltd. was a subject matter of challenge before this Court as a part of the group of appeals disposed of as CIT v. Continental Warehousing Corporation (Nhava Sheva) Ltd. [2015] 374 ITR 645/58 taxmann.com 78/232 Taxman 270 (Bom.) upholding the view of the Special Bench of the Tribunal in Al- Cargo Global Logistics Ltd. Consequently, once an assessment has attained finality for a particular year i.e. it is not pending then the same cannot be subject to tax in proceedings under Section 153A of the Act. This of course would not apply if incriminating materials are gathered in the course of search or during proceedings under Section 153A of the Act which are contrary to and/or not disclosed during regular assessment proceedings. 7. In view of the above, on issue of jurisdiction itself the issue stands concluded against the revenue by the decision of this Court in Continental Warehousing Corpn. (Nhava Sheva) Ltd. (supra). In the appeal before us, the revenue has made no grievance with regard to the impugned order of the Tribunal holding that in law the proceedings under Section 153A of
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the Act are without jurisdiction. This in view of the fact that no assessment were pending, so as to abate nor any incriminating evidence was found. The grievance of the revenue is only with regard to finding in the impugned order on the merits of the individual claim regarding gifts and deemed dividend. However once it is not disputed by the revenue that the decision of this Court in Continental Warehousing Corporation (Nhava Sheva) Ltd. (supra) would apply to the present facts and also that there are no assessments pending on the time of the initiation of proceedings under Section 153A of the Act. The occasion to consider the issues raised on merits in the proposed questions becomes academic. 8. In the above view, the questions as framed in the present facts being academic in nature, do not give rise to any substantial question of law. Thus not be entertained.”
The co-ordinate bench has followed the above said binding decisions of jurisdictional High Court in the assessee’s own case in AY 2012-13, wherein it was held as under:- “24. We have heard the rival submissions of both the parties and perused the material on record including the orders of authorities below and various decisions cited by Ld AR. In the instant case, the assessee filed the return of income under section 139(1) of the Act on 29-09-2012 which was revised on 27-09-2013 and assessment was framed vide order dated 12.11.2014 passed u/s 143(3) of the Act. We note that search was conducted under section 132(1) of the Act on 9-1-2018 on Shrem group and others including the assessee and there was no pending assessment on the date of search. Since there was no assessment pending for the instant year on the date of search, thus the present assessment year has not abated on that date. Admittedly in the present case no incriminating was found during search qua the sale of shares. Therefore, this is an undisputed position of law that in case of unabated assessment year, no addition can be made in absence of any incriminating material found during the course of search. The case of the assessee is squarely covered by series of decisions which are dealt with as under:
a) In CIT v. Continental Warehousing Corporation (Nhava Sheva) Ltd (supra), the Hon’ble Bombay High Court has held that no addition can be made in respect of assessment which have become final on the date of search if no incriminating material is found during search and the SLP filed by the revenue against the order of Bombay High in SLP (Civil) Diary Nos.18446/2018 has been dismissed vide order dated 09-07-2018.
In view of the above facts and circumstances of the case and various decisions as discussed above, we are of the considered view that the additions made are without valid jurisdiction and accordingly directed to be deleted by setting aside the order of Ld CIT(A). The ground no. 1 & 2 are allowed.”
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We may also gainfully refer to the decision rendered by Hon’ble Delhi High Court in the case of Kabul Chawla, wherein identical view was expressed. The Hon’ble Delhi High Court has summarized the legal position with regard to the provisions of sec.153A as under:-
“Summary of the legal position
On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under:
i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place.
ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.
iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax".
iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material."
v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings.
vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.
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vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.”
We noticed that the Learned CIT(A) had placed reliance on the decision rendered by Hon’ble Supreme Court in the case of P R Metrani (supra) in support of his decision that the impugned assessment is valid. However, we notice that, in the case of P R Metrani (supra), the Hon’ble Supreme Court has interpreted the provisions of sec.132(4A) vis-à-vis then existing sec. 132(5), which provided passing of an order for the purpose of retaining the assets seized during the course of search. This is general interpretation of sec. 132(4A) vis-a-vis then existing sec. 132(5) of the Act and it does not change the interpretation given by Hon’ble Bombay High Court in respect of sec. 153A of the Act.
Before us, the Ld D.R placed his reliance on the decisions rendered by Hon’ble Kerala High Court, Hon’ble Allahabad High Court and Hon’ble Karnataka High Court to reiterate his contention that the availability of incriminating material is not the condition for making addition in the case of unabated assessments. However, as rightly contended by Ld A.R, this Tribunal and the assessing officer are bound to follow the decision rendered by Hon’ble jurisdictional Bombay High Court rendered in the cases of Continental Warehousing Corporation (Nhava Sheva) Ltd (supra) and Gurinder Singh Bawa (supra).
In the instant case, there is no dispute with regard to the fact that the assessment of AY 2013-14 stood completed u/s 143(3) of the Act much prior to the date of search and hence it would fall under the category of “unabated/finalized/completed assessments”. There is also no dispute with regard to the fact that the search officials did not unearth any incriminating material during the course of search warranting interference of the issues already stood concluded in unabated assessment. The conclusion reached by
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the AO that this assessee has obtained accommodation entries for generating artificial capital gains/capital losses is on the basis of some generalized external information supplied by the investigation wing of income tax department and no material was found during the course of search from the assessee validating the said information. In our view, the generalised external information cannot be considered as “incriminating material found during the course of search”. It is an admitted fact that no evidence/material was found during the course of search to come to the conclusion that the assessee has availed accommodation entries only. Hence the decisions rendered by the Hon’ble Jurisdictional Bombay High Court in the case of Continental warehousing Corporation (Nhava Sheva) Ltd (supra) and Gurinder Singh Bawa (supra), in our view, shall squarely apply to the facts of the present case. Accordingly we hold that the AO, in the absence of any incriminating material found during the course of search relating to the impugned additions, was not justified in assessing capital losses/capital gains in the hands of the assessee in AY 2013-14. We notice that an identical view has been taken by the co-ordinate bench in the assessee’s own case in AY 2012-13.
In view of the foregoing discussions, we set aside the order passed by Ld CIT(A) in AY 2013-14 and direct the AO to delete the additions made in respect of capital loss/capital gains.
The assessee has raised a ground on confirmation of disallowance of capital loss. Since we have held that no addition could be made in this year in the absence of any incriminating material, this ground of the assessee does not require any specific adjudication.
We shall now take up the appeal filed by the revenue for AY 2013-14. The revenue is aggrieved by the decision of Ld CIT(A) in deleting the assessment of capital gains as unexplained cash credit and also deleting the alleged commission payment.
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The Ld D.R supported the order passed by the AO. However, the ld A.R submitted that the Ld CIT(A) has granted relief in this year following the decision rendered by him on identical issues in the assessee’s hand in AY 2012-13 and 2014-15, which has since been upheld by the Tribunal. However, we do not find it necessary to decide the issues on merits, since we have held that no addition could be made in this year in the absence of any incriminating material. Accordingly, the appeal of the revenue filed for AY 2013-14 is rejected.
We shall now take up the appeal filed by the revenue for Ay 2015-16. The revenue is aggrieved by the decision of Ld CIT(A) in deleting the addition of Rs.30.57 crores, being sale proceeds of shares assessed u/s 68 of the Act by the AO. The assessee has filed a Cross objection validity of issuing notice u/s 68 of the Act.
The facts relating to the case in AY 2015-16 are stated in brief. The assessee filed its return of income for this year on 28-07-2016 declaring a total income of Rs.14.91 crores. We notice that this return is a belated return filed u/s 139(4) of the Act. The assessing officer issued a notice u/s 148 of the Act on 14.09.2016 on the reasoning that the assessee has purchased and sold certain shares, which were identified as penny stock. The assessing officer completed the assessment by assessing the sale proceeds of shares amounting to Rs.30.57 crores as unexplained cash credits u/s 68 of the Act.
In the appellate proceedings, the Ld CIT(A) noticed that identical addition made in respect of sale of shares of another company by the AO in AY 2014-15 had been deleted by the Ld CIT(A) and the same has also been upheld by the ITAT, vide its order dated 08-06-2020 passed in ITA No.5039/Mum/2018. Following the same, the Ld CIT(A) deleted the above said addition made by the AO. Aggrieved, the revenue has filed appeal before the Tribunal.
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The assessee had challenged the validity of reopening of assessment before Ld CIT(A) on the ground that there was no material available with the AO for reopening the assessment. The Ld CIT(A) rejected the contentions of the assessee and upheld the validity of reopening of assessment. Hence the assessee has filed Cross objection challenging the validity of reopening of assessment.
Since the legal issue urged by the assessee goes to the root of the matter, we heard the parties first on the legal issue relating to the validity of reopening of assessment.
Before us, the Ld A.R challenged the validity of reopening of assessment on a different reasoning, i.e., the Ld A.R submitted that the assessee has filed the return of income on 28-07-2016. It is pertinent to note that the assessing officer has mentioned the date of filing of return of income as 21-09-2016 in the assessment order. However, from the acknowledgement copy of return of income filed for AY 2015-16 at page 1 of the paper book, it can be noticed that the return of income was filed on 28-07-2016. It is a belated return of income filed u/s 139(4) of the Act. We notice that the notice u/s 148 of the Act was issued on 14.09.2016, i.e., after filing of return of income by the assessee.
The time limit available with the assessing officer for issuing notice u/s 143(2) of the Act was upto 30-09-2017. However, the assessing officer chose to reopen the assessment by issuing notice u/s 148 of the Act on 14- 09-2016, even though the time limit for issuing notice u/s 143(2) was available at that point of time. It is the contention of the Ld A.R submitted that such an action of the AO was not in accordance with the provisions of the Act. He further submitted that such kind of action of AO was held to be not valid by the Hon’ble jurisdictional Bombay High Court in the case of Smt. Suman vs. ITO (84 taxmann.com 267)(Bom). Accordingly, the Ld A.R
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submitted that the impugned assessment order is liable to be quashed on this ground alone.
On the contrary, the Ld D.R submitted that there is no specific bar in the Act for reopening of assessment by issuing notice u/s 148 of the Act before the expiry of time limit for issuing notice u/s 143(2) of the Act.
We have heard rival contentions and perused the record. In the case of Smt. Suman (supra), the jurisdictional Hon’ble Bombay High Court has examined following question:- “Whether AO can proceed with extraordinary power u/s 147, particularly when normal procedure of assessment of income u/s 143(3) are available which are otherwise within time?”
The Hon’ble Bombay High Court has answered this question as under:-
“9. It is an undisputed position before us that on 25.01.2000 when the Assessing Officer issued a notice under Section 148 of the Act to reopen the assessment for Assessment Year 1999-2000, even before the time to issue notice under Section 143(2) of the Act to assess under section 143(3) of the Act had expired. It is clear from Section 143(1)(i) of the Act as in force at the relevant time that the intimation thereunder is without prejudice to the right of the Revenue to proceed under Section 143(2) of the Act. Thus, issue of intimation by itself does not bring to an end an assessment proceeding. It comes to an end only when the time to issue a notice under Section 143(2) of the Act expires/come to an end. 10. On the other hand, Section 147/148 of the Act empowers an Assessing Officer to reopen an assessment wherever he has reason to believe that income chargeable to tax has escaped assessment. This power under Section 147/148 of the Act is subject to various limitation provided therein. The power of reopening of assessment can be exercised where assessment has not been completed under Section 143(3) of the Act or even where intimation under Section 143(1)(i) of the Act has been issued provided the time to take further proceeding by issuing notice under Section 143(2) of the Act to complete assessment under Section 143(3) have already expired. So long the time is available to complete an assessment under Section 143(3) of the Act after having issued intimation under Section 143(1) of the Act, there can be no occasion for the Assessing Officer to have reason to believe the income chargeable had escaped assessment, for the reason that the Assessing Officer can issue notice under Section 143(2) of the Act, to complete assessment under Section 143(3) of the Act. Thus, it is a power vested in the Assessing Officer to disturb a concluded issue within a specified period by reopening an
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assessment. Therefore, it cannot be exercised till the period for completion of assessment has expired. Section 147/148 of the Act is not a power to be exercised to abort the regular assessment proceeding by issuing notice for reopening an assessment. The proceedings under Section 147/148 are not parallel to regular assessment proceedings under Section 143(2) & (3) of the Act. 11. The impugned order relies upon Explanation 2(b) to Section 147 of the Act to sustain the reopening notice. Explanation 2(b) to Section 147 reads as under :— "Section 147 ………….. 2: Explanation: For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has been escaped assessment, namely :— (a) …………. (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;"
The aforesaid explanation deals with case where income chargeable to tax escapes assessment including a case where a return of income has been filed, but no assessment has been made. The aforesaid explanation seeks to clarify that merely because no assessment has been made even after filing a return, it will not be open to suggest that no income chargeable to tax has escaped assessment. This covers issue where there is no possibility of making an assessment on the date when the notice under Section 147/148 of the Act is issued. So long as the time to issue notice under Section 143(2) of the Act is available, it cannot be said that no assessment has been made as the possibility of making an assessment is always available. The Assessing Officer is obliged to complete assessment under Section 143(3) of the Act by issuing a notice under Section 143(2) of the Act, if he is of the view that the assessee has understated his income or computed excessive loss or understated his tax to the prejudice of the Revenue. Therefore, we are clear that in view of the provisions of Section 143(1)(i) of the Act is in force at the relevant time, no notice under Section 148 of the Act can be issued, till the period to issue notice under Section 143(2) of the Act has expired.”
We notice that the Hyderabad bench of Tribunal has also considered an identical issue in the case of Venkata Siva Reddy Nellore Vs ITO (ITAT Hyderabad) in ITA No. 962/HYD/2017 dated 22/11/2017, wherein it was decided in favour of the assessee as under:-
“8. After considering the orders of authorities and principles of law, I am of
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the opinion that the orders of assessing officer and Commissioner (Appeals) cannot be sustained. The issues contested by assessee can be categorized under the heads :– i. Whether reopening under section 147 is correct when the time to issue a notice under section 143(2) is open? ii. Whether the assessment made on the issue without making any addition of the so called escaped income is correct? iii. Whether the non-disposal of assessee objections by a speaking order is correct in law?
8.1. The facts indicate that the assessee filed return of income on 26-7- 2013 for assessment year 2012-13, even though belatedly as to the time prescribed under section 139(1), but within the time provided under section 139. On receipt of return, assessing officer has time to issue notice under section 143(2)/142(1) for a period of six months i.e., upto 31-1- 2014. However, assessing officer choose to reopen the assessment on the reason of income escaping assessment on 12-12-2013, when the assessment proceedings have not even been started. On the issue whether the proceedings under section 147 are correct when a notice under section 143(2) could have been issued was considered by the Co-ordinate Bench. The Co-ordinate Bench in the case of M/s. Eenadu Relief Fund v. DDIT(E)- II in ITA No. 434/Hyd/2010 dt. 13.1.2011 (quoted before the learned Commissioner (Appeals) in written submissions) by assessee, held as under :–
“9.3. Return filed for the assessment years 1994-95 on 28-3-1996 and the same was processed under section 143(1). Later 148 Notice was issued on 18-6-1996 though time available for issue of notice under section 143(2) was upto 31-3-1997.
9.4. In the case of CIT v. Qatalys Software Technologies Ltd. (308 ITR 249), the Madras High Court held that reopening is improper when the time limit is available to issue notice (xi) 143(2). As seen from the above, in the case of K M Pachayappan (304 ITR 264) and Qatalys Software Technologies Ltd. (308 ITR 249) Madras HC by placing reliance on the judgment of SC in the case of Rajesh Jhaveri (supra) held that the assessing officer was barred from initiating reassessment proceedings under section 147 when the time for issuance of notice under section 143(2) had not expired. However, taken a different view in the case of ITO v. K M Pachiyappan (311 ITR 31) (Mds.) upheld that the assessing officer in initiating the proceedings under section 147 in similar circumstances. However, it appears that the important distinction in fact of these two cases namely time available for issue of notice under section 143(2) had not expired in the case of K. M.Pachiappan (311 ITR 31) has not placed before the Madras High Court.
Further, the Tribunal in the case of Super Spinning Mills Ltd. v. Addl. CIT Tribunal Tax (3rd Member) (Chennai) held that :–
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The department wants to interpret the expression ‘no assessment has been made’ in clause (b) of Explanation 2 to S.147 to mean that it also includes situation where assessment under section 143(3) is till possible but not yet made. If this interpretation is to be accepted, it will set at naught the fundamental principles underlying s.147 and which principles have been followed till date. These principles are applicable even to the extended meaning given to them term ‘escaped assessment’ in the amended provision. The above clause is intended to cover the following two situations (i) where a return is filed and non action is taken either under section 143(1) or under section 143(3) and the time limit for issuing notice under section 143(2) has expired (ii) where a return is filed and is processed under section 143(1) and the time limit for issuing notice under section 143(2) has expired. It does not envisage a situation where a return is filed and the time limit for issue for issue of notice under section 143(2) has not expired. Unless the return filed by the assessee is scrutinized by the assessing officer he cannot come to the conclusion of any escapement. If the assessing officer issues notice under section 143(2), the quite obviously he would scrutinize the return and frame the assessment under section 143(3). Subsequently, he may notice escapement and issue notice under section 148 Besides this, in the above two situations also he will have to look into the return to see whether there is escapement or not. If he notices any escapement, it can be called an escapement only if it is notice after the proceedings under section 147. In that event he will have to issue notice under section 143(2). In nutshell, (a) the proceedings are said to have commenced once the return is filed, and (b) the proceedings terminate when (i) the return is processed under section 143(1) and the time to issue notice under section 143(2) is over (ii) assessment is made under section 143(3) or, (iii) the assessment is no longer possible under section 143(3). Processing under section 147 can be initiated only after the earlier proceedings have terminated as mentioned above. Order under section 147 read with section 143(3) was therefore liable to be quashed.
In view of the above discussions, we are inclined to hold that unless the return filed by the assessee is scrutinized by the assessing officer under section 143(3), we cannot come to the conclusion of any escapement, the assessing officer cannot initiate proceedings under section 147 when the time for issuance of notice 143(3) has not expired. The case law relied by the assessee’s counsel laid down the same proposition of law. Accordingly, we allow the first ground of the appeal of the assessee by holding that this reopening of assessment by issue of notice under section 148 dated 17-10-2007 is bad in law”.
Thus, on the facts of the case and principles of law, the reopening is ab initio void.”
In the instant case, we have noticed that the time limit for issuing notice u/s 143(2) was available when the assessing officer issued notice u/s 148 of the Act. As per the ratio of the jurisdictional Hon’ble Bombay High Court referred above and also the decision rendered by the Hyderabad bench
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of Tribunal, the said reopening of assessment is bad in law and void ab initio. Accordingly, following the binding decision rendered by Hon’ble jurisdictional Bombay High Court, we quash the impugned orders passed by the tax authorities below for AY 2015-16. Since we have quashed the assessment order, it is not necessary to adjudicate the grounds urged by the revenue on merits.
In the result, the both the appeals of the revenue are dismissed. The appeal and cross objection filed by the assessee are allowed.
Order pronounced in the open court on 02.09.2022.
Sd/- Sd/- (KAVITHA RAJAGOPAL) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 02/09/2022 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai